Protective put loss budget by strike and tenor

What a protective put does

A protective put, also called a married put, pairs owned shares with a purchased put so the loss on the combined position can be limited to a chosen amount for as long as the put remains in force. Once the put strike, premium, and share count are set, that largest illustrated loss is the loss cap.

The cash paid for the put is the hedge premium. That outlay reduces net upside on the paired position by the same amount, so the hedge is a trade-off between a bounded loss and lower profit potential. Combined breakeven is the stock price at which the share gain offsets the put premium on the paired position.

Set objectives before strike and tenor

Hedge design begins by stating how much downside to remove, how much upside to give up, and how long protection is needed. Those answers then select expiration month and strike. Tenor is the days remaining until the chosen put expires, and it sets how long one premium purchase covers.

The source does not present one strike or tenor as universally best. The construction is the one that matches the stated risk, upside, and horizon objectives.

Two strikes on the same 1,000 shares

In the 1,000-share XLF example bought at 26.24, each one-point move in the unhedged stock equals a 1,000 change in position value. With the same 1,000-share long, ten 26.5 puts at 49 days to expiration costing 1,390 limited illustrated downside to -1,130 and raised combined breakeven to 27.63. Ten 29-strike puts costing 3,150 limited illustrated downside to -390 and raised combined breakeven to 29.39.

Moneyness is whether the put strike sits at or above the current share price. That placement changes both the premium paid and the tightness of the loss cap. In this illustration the higher strike paid more hedge premium and produced a tighter loss cap.

Longer tenor versus a put that must be replaced

A third illustration buys ten 26-strike puts with 378 days to expiration for 3,200. That purchase can be compared with the cheaper 49-day put only after noting that the short-term put expires and must be replaced if the hedge is to continue.

Roll cost is the extra premium required if protection is extended by buying a new put after the first one expires. Repeating short-dated put purchases to keep protection in force can accumulate more premium than buying a longer-dated put at the outset.